Setting at rest the uncertainty about overseas investments, Finance Minister Pranab Mukherjee today said that persons investing in stock markets through participatory notes (P-Notes) will not have to pay taxes in India, an assurance that pushed up the markets. (Read: What are Participatory notes?)
"Indian tax authority would not go beyond financial investor (FIIs) to check the details about the P-Note holders. Accordingly, a question of liability for tax in India of the P-Note holder would not arise. Necessary clarification will be issued", he told reporters here.
Following an assurance by the Minister, the BSE Sensex shot up 285.66 to 17,344.27 points at mid session.
Participatory Notes (P-Notes) are instruments that allow foreign institutional investors (FIIs), which are not registered with market regulator Sebi, to invest in the Indian equity market.
Referring to the provisions in the Finance Bill 2012 on overseas investments, Mukherjee said, "I would like to categorically clarify that the intention of the government is is not to cause any harassment to genuine investors."
Pointing out that P-Note holders invest in stock market through FIIs, the Minister said, "the income tax department would examine the tax liability of the FIIs."
The proposals in the Finance Bill 2012 relating to taxation of indirect transfers of assets and General Anti- Avoidance Rules (GAAR) have created concerns among the foreign investors leading to uncertainty in the stock markets.
The Asia Securities Industry & Financial Markets Association (ASIFMA) along with Securities Industry and Financial Markets Association (SIFMA) had written to the Finance Minister contending that "such onerous taxation or even the risk of such taxation could threaten this important source of capital for India's businesses".
Noting that FIIs are carefully evaluating these new tax risks, the letter had said the proposals were too broadly worded.
FIIs have assets under custody of more than Rs 10 lakh crore or 17% of the capitalisation of India's equity markets. Further, these entities also invest in Indian government and corporate debt, as per the letter.
It appears that market participants have already begun to reduce their positions in India, it said.
In the Budget for FY13, Mukherjee has proposed GAAR in order to "counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, by enabling a review by a GAAR panel".
The fear of GAAR had spooked stock markets had pulled them down on concerns that all short-term capital gains made by FIIs and P-Note investments would be taxed.
As per the Finance Bill, GAAR would be applicable from April 1.
A lack of clarity on taxation of P-notes has contributed to the recent volatility in the domestic share market. In the wake of the uncertainty, CLSA, Asia’s leading brokerage group, stopped selling participatory notes.
Concerns about selling by foreign investors kept shares under pressure this week.
Now, however, the markets have settled and moved up on assurance by Mukherjee that P-Note holders will not be taxed and a clarification will be issued by the Finance Ministry.
